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Whatever it takes to save the planet? Central banks and unconventional green policy

Published online by Cambridge University Press:  13 February 2023

Alessandro Ferrari  and
Valerio Nispi Landi
Alessandro Ferrari
Affiliation:
DG Monetary Policy, Monetary Analysis Division, European Central Bank, Frankfurt am Main, Germany
Valerio Nispi Landi*
Affiliation:
Harvard Kennedy School, Cambridge, MA, USA Bank of Italy, Rome, Italy
*
*Corresponding author. Email: [email protected]
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Abstract

We study the transmission mechanism of a Green QE, defined as a policy that tilts the central bank’s balance sheet toward green bonds, that is bonds issued by non-polluting firms. We merge a DSGE framework with an environmental model, in which CO2 emissions increase the stock of atmospheric carbon, which in turn decreases total factor productivity. Imperfect substitutability between green and brown bonds is a necessary condition for the effectiveness of Green QE. However, even under this assumption, the effect of Green QE in reducing emissions is negligible and in some cases close to nil.

Keywords

Central bankmonetary policyquantitative easingclimate change
Type
Articles
Information
Macroeconomic Dynamics , Volume 28 , Issue 2 , March 2024 , pp. 299 - 324
Copyright
© The Author(s), 2023. Published by Cambridge University Press

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Footnotes

†

We thank the editor, two anonymous reviewers, and our discussant Barbara Annicchiarico for their useful feedback. We are also grateful to Katrin Assenmacher, Alessandro Cantelmo, Paola Di Casola, Massimo Ferrari Minesso, Gianluigi Ferrucci, Francesco Giovanardi, Peter Karadi, Filippo Natoli, Stefano Neri, Salvatore Nisticò, Maria Sole Pagliari, Andrea Papetti, Francesco Paternò, Cosimo Petracchi, Massimiliano Pisani, Luca Riva, Alessandro Secchi, Andrea Tiseno, seminar online participants at the ECB, Bank of Italy, Brown University, Sveriges Riksbank, E-axes Forum, and conference participants at the 19th Macroeconomic Dynamics Conference, at the 62nd Annual Conference of the Italian Economic Association, and at Banque de France’s conference on Advances in Macro and Finance Modelling of Climate Change for their comments and suggestions. The opinions expressed in this paper are those of the authors and do not necessarily reflect the views of the ECB, the Bank of Italy or the Eurosystem.

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